Friday, January 10, 2014 - Jobs Report Friday

Jobs Report Friday

by Sinclair Noe

DOW – 7 = 16,437
SPX + 4 = 1842
NAS + 18 = 4174
10 YR YLD - .10 = 2.86%
OIL + 1.23 = 92.89
GOLD + 20.90 = 1248.60
SILV + .63 = 20.27

Jobs report Friday. The US economy created only 74,000 net new jobs in December. The number of jobs created was the lowest in 3 years and was well short of expectations for about 195,000 jobs. In the four months before December, the average number of jobs created in the US was 214,000 a month. The Labor Department said 38,000 more jobs in November were created than the 203,000 previously reported.

And the unemployment rate dropped from 7% to 6.7%.

If that doesn't seem to add up, you are correct. The headline news that the unemployment rate dropped to 6.7% is not good. The problem is that a bunch of people fell out of the labor force, 347,000, to be exact. They stopped looking for work, which made them no longer "unemployed" in the eyes of the Bureau of Labor Statistics; they just become invisible.

The Labor Force Participation Rate dropped from 63% in November to 62.8% in December. This is a measure of the working age population in the labor force. The participation rate is well below the 66% to 67% range that had been considered typical over the past 20 to 30 years. The participation rate has been dropping for the past 12 years.

Part of the reason for the drop in the participation rate is due to the Baby Boomers retiring, but that's just part of it; and actually many boomers are staying in the work force, unable to retire after the financial crisis of 2008. The bigger problem is that the economy is not strong enough to create enough jobs to keep or bring people into the labor force. Not just boomers, but also younger people are leaving the labor force, or never getting in. Many younger people are in school and not counted as part of the labor force, while others are probably just hanging out, plotting how to overtake this flawed economic system that has failed them.

So, when we look past the young people who can't get a job and the older people who are retiring whether they can afford to or not, we turn to the 25 to 54 year olds, the meat and potatoes of the labor force; The 25 to 54 participation rate declined in December to 80.7% from 80.9%, and the 25 to 54 employment population ratio increased to 76.1% from 76.0%. So, for many people in their prime earning years, there just isn't work to be found. And if they find work, it takes a while to get up to speed on wages. It now takes the average worker until age 30 to earn the national median salary; young workers in 1980 reached that point in their careers at age 26. This has significant implications for financial prosperity later in life.

So, we had very weak growth in new jobs, just 74,000 and the unemployment rate dropped significantly from 7% to 6.7%.

Women gained, on net, 75,000 jobs in December; men lost, on net, 1,000 jobs. This was the first time since December 2007 that a month’s job gains were captured entirely by women. Women represented 56% of the net gain in the 12 months. Women also suffered far fewer job losses during the downturn, partly because men are more likely to work in industries very sensitive to the business cycle. Also, because women are generally paid less than men to begin with. Women’s recent job gains have been concentrated in low-wage sectors, though not exclusively.

As a side note, we learn today that American workers tend to stick to the same job longer today than they did 10, or 20, or 30 years ago. Workers had an average job tenure of 4.6 years in 2012, the last year for which figures are available, that’s up from 3.7 years in 2002 and 3.5 in 1983. And that holds for all age and gender categories.

American workers are stuck in a rut, and they’re staying in their jobs longer rather than seeking new opportunities. A high “churn” rate is typically seen as a reflection of a healthy economy. People are holding on to their jobs not because they want to, but because they don’t have as much opportunity as they once did. There were about 4.2 million so-called separations in October 2013, the latest month for which data are available; this is still down from 5.1 million in 2006, but a significant improvement on 3.9 million separations in 2011.

The leisure, manufacturing and services sectors added jobs in December, but construction cut 16,000 jobs, the biggest drop in the industry in 20 months. Some of the cuts in construction might be weather related. Retailers hired 176,000 workers in December; much of that is seasonal hiring but it was the highest level of seasonal hiring since 1999. The net gain for retailers was 55,000 jobs.

Health care cut 6,000 jobs, for the first cut in 10 years; I'm not sure what that says about the implementation of Obamacare. Transportation and warehousing lost a small number of jobs; this might suggest that shippers hired fewer workers for the holidays; UPS should have hired more. Factories added 9,000 jobs for a fifth straight monthly gain, however that was down from 31,000 in November.

Involuntary part-time workers, or people working part time because they can't find full time work, held steady at 7.8 million. These workers are counted in an alternate measure known as U-6, which measures unemployed as well as under-utilized workers. The U-6 was unchanged at 13.1% for December.

Long term unemployment remains a problem, with more than 3.8 million workers unemployed for 26 weeks or more and still wanting a job; that number was down from just over 4 million in November. Last month, 37.7% of the unemployed had been so for at least six months (2.5 percent of the labor force), an average that fell only slightly over the year, down about one percentage point. These long-term unemployment measures remain highly elevated, both in historical terms and most importantly relative to times in the past when Congress allowed extended benefits to expire.

State and local governments lost jobs for 4 straight years, but actually added about 54,000 jobs for 2013; however for the month of December, local government jobs dropped by 11,000. Federal government jobs continued to drop, of course.

The private sector has added jobs for 46 consecutive months, increasing by 8.2 million over that period. For 2013 the economy added 2,186,000 jobs; down slightly from 2012; up slightly from 2011; much better than 2008 and 2009, when we lost a combined 8.6 million jobs. The unemployment rate has dropped from 7.9% in December 2012 to 6.7% in December 2013, but again, much of that was due to people leaving the work force. The share of Americans with jobs did not increase in 2013. The economy added about 182,000 jobs a month, just enough to keep pace with population growth.

At the end of 2006, 63.4% of American adults had jobs; for 2013 the employment rate had dropped to 58.6%. The unemployment rate doesn't measure the share of American adults who don't have jobs, it only counts people who are seeking work, and the unemployment rate has been dropping because fewer people are seeking jobs.

This weak report is just one month, and that is not enough to form a trend. There will be revisions in coming months. The BLS director said that cold weather may have distorted the figures a little, maybe not.

Today's jobs report may have some important policy implications. The decline in unemployment may limit the Federal Reserve’s ability, or at least its willingness, to stimulate the economy. St. Louis Fed Bank President James Bullard said today the central bank is likely to continue to reduce its bond purchases and not be swayed by the weak December job report. "I would be disinclined to react to one month's numbers," Bullard told reporters after a speech in Indianapolis. "For now we are on a program where we are likely to continue to taper at subsequent meetings," he said. Starting this month, the Fed reduced its monthly bond purchases to $75 billion from $85 billion. The Fed rate-policy committee meets again on Jan. 28-29.

This morning's report suggests the economy is recovering in starts and fits; what it should tell the Fed is that their QE never really trickled down to the average American family. The Fed may claim that the wealth effect from artificially stimulated housing markets and QE juiced stock markets has been a rising tide that lifts all boats, but the reality is that it only lifted yachts. And the problem, or one of the problems, is that the rich spend a far smaller proportion of their earnings than the middle class and poor; who tend to live paycheck to paycheck or even hand to mouth. This is why the Fed's reliance on the wealth effect has resulted in a demand deficit, and ever-slowing velocity of money. The rich save, the poor spend, and when money is spent, it circulates through the economy, creating demand, and to meet demand businesses hire people, or people take entrepreneurial incentive; and this is how jobs are created – by demand.

It’s the job market, not the stock market, that most people depend on for their economic well-being, and as long as the former remains below full employment and with a declining share of participants, the benefits of growth will not reach far beyond the top echelons and the economy will not get out of second gear. 

Thursday, January 09, 2014 - A World Of Central Bankers

A World Of Central Bankers

by Sinclair Noe

DOW – 17 = 16,444
SPX + 0.64 = 1838
NAS – 9 = 4156
10 YR YLD - .03 = 2.96%
OIL - .67 = 91.66
GOLD + 1.80 = 1228.70
SILV + .02 = 19.65

If it's not one central bank, it's another. Today the European Central Bank and the Bank of England met to determine monetary policy. Back in November, the ECB cut interest rates to 0.25%, so there were no expectations of further rate cuts in today's meeting. In Britain, which is outside the euro zone, the Bank of England left its benchmark interest rate unchanged at a record low of 0.5 percent.

As the US Federal Reserve has been creating new dollars at the rate of $85 billion a month under Quantitative Easing, the Fed's balance sheet has been growing, even as the ECB's balance sheet has been shrinking. And even though the Fed announced it would scale back those purchases by $10 billion a month, that just means the Fed balance sheet will continue growing, just not as fast. Or the bottom line; the Fed is creating money and the ECB is not.

Today, Mario Draghi, the president of the ECB said he wanted to “strongly emphasize” his earlier promise to keep monetary policy easy for as long as necessary. And Draghi said the ECB was “ready to consider all available instruments” to address either further weakness in consumer prices or increases in short-term money market rates that could put stress on banks. He did not, though, specify what tools he would use. The fear in Europe is that a nascent recovery could sputter and that low inflation (0.8% in December) could turn into deflation.

When asked if the euro crisis was over, Draghi said, “The recovery is there, but it’s fragile,” and it was too soon to declare victory. Even that might be a stretch. The unemployment problem for much of the euro-zone remains lousy; stuck at 12.1% for the past 9 months, and in some areas, youth unemployment is still around 50%, very dangerous levels. The problem for the ECB is essentially the same problem the Fed faces – how to improve aggregate demand. The ECB has been offering cheap money to the euro banks but the credit isn't getting through to companies and households. Lending to small businesses in the euro zone shrank 3.9% in November from a year ago, the biggest decline recorded by the ECB.

And with the Fed taper ready to kick in, the hope is that other countries and other central banks will pick up some slack in the world economy. Draghi has promised to do whatever it takes, and today he reiterated that promise, but that has been the promise for the past couple of years, and a couple of years can easily turn into a lost decade.

Here in the US, Ben Bernanke's farewell tour included a luncheon on Capitol Hill with Congress-folk, where he received a standing ovation and some of his past critics seemed to go soft. Bernanke offered an optimistic view of the economy, listing the country’s booming energy sector, stronger financial institutions and modest federal budget deficit reductions as positive signs.  Bernanke indicated he is more worried about the economic fate of middle-class families than the federal budget deficit going forward.

Meanwhile, the newly confirmed Federal Reserve Chairwoman, Janet Yellen has granted an interview to Time magazine and here's what she says about the economy: "I think we'll see stronger growth this year. Most of my colleagues on the Fed's policymaking committee and I are hopeful that the first digit [of GDP growth] could be 3 rather than 2... The recovery has been frustratingly slow, but were making progress in getting people back to work, and I anticipate that inflation will move back toward our longer-run goal of 2 percent." On the housing market, which had a brief lull this fall: "I expect it to pick back up and I do expect a further recovery."

Talking about the Fed's QE program, Yellen seems to believe that higher home prices and stock market stimulation is helping the average family. She is clearly a believer in the wealth effect, even though I have to question what data she might be looking at. RealtyTrac just released its Home Equity and Underwater Report for December 2013, which shows that 9.3 million US residential properties were deeply underwater, or about 1 in 5 of every property with a mortgage. "Deeply underwater" is defined as worth at least 25% less than the combined loans secured by the property. There are fewer homeowners who are deeply underwater, but there are still millions who are in serious trouble, and the longer these homeowners remain in a negative equity position without relief in the form of a principal loan balance reduction, the more likely that foreclosure will become the path of least resistance for them.

And on the jobs front, recent data from the Economic Policy Institute shows we're still about 1.3 million jobs below the pre-crisis peak – that's just to get back to break even, and then we would need about 6.6 million more jobs to get to where we need to be, in other words, how many jobs would be needed to employ all the people who would be actively looking for work if the economy were running at full steam.

The 7% unemployment rate is misleading because it is based partly on people dropping out of the work force and no longer being counted as unemployed. The economy is not strong enough to create jobs, so labor-force growth is not living up to its potential. If people who have dropped temporarily out of the labor force were still looking for jobs, the real unemployment rate would be 10.3%, not 7%. In other words, Dr. Yellen's confidence in the wealth effect never filtered down to the actual labor force.

If labor force participation drops, if for whatever reason, millions of people are no longer counted as part of the labor force, as is the case in the US, it’s a troublesome indicator for the economy and the real employment picture. It also makes the unemployment rate, now 7%, look a lot less awful: if you’re not counted in the labor force, and you don’t have a job, you’re not counted as unemployed. There are millions of people in that category. And their numbers are growing, not diminishing. The irony of the U-3 unemployment statistic is the fact that while unemployment has gone down 30% since its 2009 peak, we have the lowest labor force participation rate in over 3 decades.

People 55 to 64 years old, the first forget-about-retirement generation, are staying in the labor force to an ever greater degree. In 1992, only 56.2% were still in the labor force, in 2012, 64.5% were. Similar for older folks. The participation rate for people 65 to 74 years old jumped from 16.3% to 26.8%. Reality is this: fewer people can afford to retire. And the further reality is that the older workers are getting paid less.

The pattern among employers in a downturn in managing the non-executive/senior managerial workforce was to push out higher-cost older workers in favor of cheap, high energy, less set-in-their-ways new hires. Lots of people over 40 were given the heave-ho. Some eventually found work at much lower pay, some became self-employed (it’s a lot harder than the business press lets on; 9 out of every 10 new businesses fail in the first three years), and some retired, living more modestly than they had wanted to.

But who is not making it into the labor force? Young folks. The participation rate for those 16 to 19 has plunged from 51.3% in 1992 to 34.3% in 2012. OK, the BLS explains that by an increase in school attendance, and that would be a good thing. But the 25 to 54 year olds? Even among them, participation rates dropped from 83.3% in 2002 to 81.4% a decade later.

Among the 18 to 34 year old “Millennials,” those lucky ones who’re official counted in the labor force, unemployment has been a nightmare, with double digit unemployment rates, still, nearly 6 years after the financial crisis. It’s even worse for the 16 to 24 year olds, whose official unemployment rate is still 15%. In prior downturns, the employment rate for young adults nearly reached pre-recession levels within 5 years.

In the Great Recession, young adult employment had not even recovered halfway by the same point. A quarter of all job losses for young adults came after the Great Recession was officially over. The lack of jobs had driven many discouraged young people from the labor force altogether. A recent report by Opportunity Nation estimates that 5.8 million young adults are neither working nor in school.

And on the issue of banking reform Yellen says Dodd-Frank is a good road map but there may be a need for further steps. Which may be the biggest understatement of the new year. The Dodd-Frank reform legislation has been moving forward at a snail's pace, and the bank lobbyists are still in the process of re-writing bits and pieces and generally eviscerating key components. And even complete fulfillment of Dodd-Frank along current lines will not end the problem of “too big to fail.” 

Still, it's nice to see an incoming Fed head act like she'll pay attention to the Fed's role as a regulator. Under Alan Greenspan, the Fed was more of a deregulator than a regulator. Under Ben Bernanke, the Fed seemed to be more concerned with crisis control, and any thoughts of regulation were subservient to not letting the banking system implode, even if the bankers had lit the fuse. Now that there is some level of equilibrium, Yellen may actually feel emboldened to … ah hell, let's not get carried away; nothing will change.

Wednesday, January 08, 2014 - Tapering is Not Tightening

Tapering is Not Tightening

by Sinclair Noe

DOW – 68 = 16,462
SPX – 0.39 = 1837
NAS + 12 = 4165
10 YR YLD + .06 = 2.99%
OIL – 1.15 = 92.52
GOLD – 5.90 = 1226.90
SILV - .32 = 19.62

Repeat after me: “tapering is not tightening.” This is the new mantra of the Fed; tapering is not tightening.

Today we got the minutes of the Fed FOMC policy meeting of December 17-18, and one of the themes is that the policy setting members of the Fed want to proceed with caution in trimming asset purchases and tapering is not on a rigid preset course; it is subject to incoming economic data and tapering is not tightening.

You will recall that the Fed announced it would cut purchases by $10 billion per month, while still making $75 billion a month in purchases of mortgage-backed securities and Treasuries. The minutes reveal “concern about the potential for an unintended tightening of financial conditions if a reduction in the pace of asset purchases was misinterpreted as signaling that the committee was likely to withdraw policy accommodation more quickly than had been anticipated." So, it's just a little tapering, not tightening.

That said, even the more dovish policymakers had to concede that QE does not pack the punch it might have once packed. From the minutes:

Regarding the marginal efficacy of the purchase program, most participants viewed the program as continuing to support accommodative financial conditions, with a number of them pointing to the importance of purchases in serving to enhance the credibility of the Committee’s forward guidance about the target federal funds rate. A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue, although some noted the difficulty inherent in making such an assessment. A couple of participants thought that the marginal efficacy of the program was not declining, as evidenced by the substantial effects in financial markets in recent months of news about the likely path of purchases.

This is not surprising, that the marginal efficacy has been declining; first, we would have to establish that there was efficacy in the scheme to begin with. OK, let's grant that QE had an effect; it certainly served as rocket fuel for the stock market and it was like bionic legs for the housing market, even if it didn't do much more. But there are limits.

The Fed has sopped up nearly a third of the Treasury market, and if they don't cut back significantly, they'll have half the market by the end off the year, and they would basically have everything on their balance sheet by 2018. This would create a liquidity problem for anybody seeking high quality collateral, and that might be problematic. Liquidity is not a problem right now, and even if the Fed continues with purchases, because they are not on a preset course with the taper, remember that there are still plenty of other central banks in the world and they have lots of liquidity to bring to the party.

But before the Fed could ever get that far, there was the concern about bubbles, or as the minutes tell us: Participants were most concerned about the marginal cost of additional asset purchases arising from risks to financial stability, pointing out that a highly accommodative stance of monetary policy could provide an incentive for excessive risk-taking in the financial sector. It was noted that the risks to financial stability could be somewhat larger in the case of asset purchases than in the case of interest rate policy...

You can see how the fear of bubbles, although the Fed would never call it a bubble, the fear of financial instability might be cause for the Fed to step back from its monetary experiment. The big banks have surely been feeling their oats, what with the Fed's Zero Interest Rate Policy, and the QE, and then the Department of Justice and SEC providing get out of jail free cards for everything from robo-signing to money laundering to well, everything.

And then back to the idea of marginal efficacy, maybe the Fed was feeling a little remorse that all the billions in asset purchasing did so very little for Main Street; maybe there was a hint of awareness of the dual mandate of price stability and maximum employment, which remains so far away. While the employment situation has been improving, it is still nowhere near maximum. We'll find out more about the direction of the the labor market on Friday with the monthly jobs report.

In a precursor to the Friday report, today ADP gave its private report showing private employers added 238,000 jobs in December, and the November figure was revised up to 229,000 from the initial estimate of 215,000; this marks the fastest pace of hiring in 13 months. The ADP report doesn't always match with the official government report, but we might guess that the Friday report will be a little stronger than the current estimates of 195,000 new jobs. Maybe.

In another positive read on the economy, the National Federation of Independent Business said small businesses hired the most workers in nearly eight years in December. In a separate report, retail industry tracker ShopperTrak reported sales rose 2.7 percent in the November-December holiday shopping season, but much of that was from promotions and discounts.

Also, the Mortgage Bankers Association reported today that applications for home mortgages rose 2.6% in the last week, rebounding from a 13 year low in the last week of December. And the Federal Reserve reports that consumer borrowing increased by $12.3 billion in November to just over $3 trillion, which pretty much matches the Fed's balance sheet after all the purchases from QE (just coincidentally). Almost all of the November increase came from an $11.9 billion rise in borrowing for auto loans and student loans. 

Fifty years ago today, then president Lyndon Johnson delivered a State of the Union address and he declared an “unconditional war on poverty”. At the time it was dismissed as so much rhetoric, but it was a significant shift in policy. Despite nostalgic reminiscence, poverty was a real problem. The idea of the massive middle class society enjoying postwar prosperity was less than a complete picture. About one-third of all Americans, 40-50 million people lived below those standards which we have been taught to regard as the decent minimums for food, housing, clothing and health.

The policies adopted as part of LBJ's War on Poverty included Medicaid, Medicare, subsidized housing, Head Start, legal services, nutrition assistance, raising the minimum wage, food stamps and Pell grants. And it worked, imperfectly, but it worked. The nation's poverty rate was cut in half, from 22.2 percent in 1960 to an all time low of 11.1 percent by 1973. Most dramatic was the decline of poverty among the elderly, from 35.2 percent in 1959 to 14.6 percent in 1974, thanks to enactment of Medicare in 1965 and cost-of-living increases for Social Security. The poverty rate among African Americans fell from 55.1 percent in 1959 (when most blacks still lived in the rural South) to 41.8 percent in 1966 (when blacks were an increasingly urban group) to 30.3 percent by 1974. But the victories in the war on poverty were short-lived.

Since 1964, the nation's population has roughly doubled while the actual number of people living in poverty is about 50 million, which works out to about 15% of the population, living below the poverty threshold. Almost as many poor people live in the suburbs as in cities -- a phenomenon that was unthinkable 50 years ago. About one-quarter (22 percent) of America's children now live in poverty. The poverty rate is much higher for Blacks (27 percent) and Latinos (26 percent) than for whites (10 percent). A significant proportion of America's poverty population are the working poor, who earn poverty-level wages.

Even more startling is the fact that 100 million people comprise what the US Census calls the poor and the "near poor," based on a new definition of poverty that measures living standards, not just income. Almost one-third of the nation, in other words, can barely make ends meet.

In the early 1960s, many Americans were ready to enlist in a war on poverty because the standard of living was improving for most families, inequality was shrinking, and people felt hopeful about the country and its future. A growing number of American families were able afford to move to the suburbs, buy homes, install air conditioners, purchase a TV, pay for a new car every few years, take a yearly vacation and even fly on an airplane. They could send their children to college and save money for a comfortable retirement. If rising affluence made a war on poverty possible, the civil rights movement and Cold War made it necessary.

During the past decade, ordinary Americans have experienced declining wages, rising joblessness, and an epidemic of foreclosures. Some pundits argue that it is difficult to elicit a generosity of spirit among economically-squeezed middle-class families. But as more and more middle class Americans face economic insecurity, they may identify their own fate with the plight of the poor. It's easier to slip into poverty than to climb out of it. Income inequality is greater in the United States than in other rich countries and Americans should be offended that a child born into poverty has such a hard time escaping it.

Within a decade after President Johnson declare a War on Poverty, we cut the nation's poverty rate in half. It is inaccurate to say that the War on Poverty failed. Without anti-poverty programs, the nation's poverty rate would likely be twice as large; and at the rate we're going, it might be.

Tuesday, January 07, 2014 - No Place Else To Go

No Place Else To Go

by Sinclair Noe

DOW + 105 = 16,530
SPX + 11 = 1837
NAS + 39 = 4153
10 YR YLD - .02 = 2.93%
OIL + .46 = 93.89
GOLD – 6.00 = 1232.80
SILV - .32 = 19.95

Had to happen, eventually I suppose; an up day on Wall Street. Traders waded through the snow and decided to buy something. No place else to go. You can look for a better explanation, but I think that sums it up: no place else to go.

Maybe some folks think we're in bubble territory in stocks. I don't know. A couple of weeks ago, economist Robert Shiller wrote an article in the New York Times claiming we were near a bubble in housing. Being near a bubble and being in a bubble are very different. Shiller has a formula for stock valuations known as CAPE, which stands for cyclically adjusted price earnings ratio. For the past 60 years or so, the CAPE ratio has been around 18.3. If CAPE moves above this estimate of the mean, eventually it will "regress to the mean" and return to the long-term average. If CAPE rises excessively above the mean, then one can argue that a bubble exists in the stock market. Right now, CAPE is estimated to be 25.

Maybe there will be a reversion to the mean by way of prices dropping or maybe there will be a reversion to the mean by way of earnings rising. Either way, the prices of the underlying assets may be high relative to the cash flows that support them for an extended period of time. Which is another way of saying the markets can remain irrational longer than you can remain solvent. Maybe the markets will hit new highs and we'll have another record setting year on Wall Street. Who knows?

The Commerce Department reports the trade gap is getting smaller, a drop in oil imports pushed the trade deficit to the lowest level in 4 years, down 12.9% for November. Petroleum imports were the weakest in three years as advances in domestic extraction put the US on track to become the world’s largest oil producer by 2015. We're still buying stuff from overseas; things like cars, and parts, and other capital goods; the American consumer is still consuming. We're exporting more, especially airplanes. There has been a pickup in US manufacturing, and it's a little more than just a wave of exports; it appears more sustainable.

Energy independence, or at least developing a comprehensive plan to achieve US energy independence could be the single biggest way to boost the economy. Recently, FedEx CEO Fred Smith was quoted as saying “Oil is at the center of everything we do. If we produce more in the US and use less and develop alternatives … you allow the United States within our economy a half a trillion dollars more in GDP."

Six Republicans sided with Democrats on a 60-37 Senate vote to revive expired federal jobless benefits. The legislation would restore benefits averaging $256 weekly to an estimated 1.3 million long-term jobless Americans who were cut off when the program expired Dec. 28. Duration of federal coverage generally ranges from 14 to 47 weeks, depending on the level of unemployment within individual states. The three-month cost to the Treasury is estimated at $6.4 billion. Without action by Congress, hundreds of thousands more will feel the impact in the months ahead as their state-funded benefits expire, generally after 26 weeks.

At issue is a system that provides as much as 47 weeks of federally funded benefits, beginning after the exhaustion of state benefits, usually 26 weeks in duration. The first tier of additional benefits is 14 weeks and generally available to all who have used up their state benefits. An additional 14 weeks is available in states where unemployment is 6 percent or higher. Nine more weeks of benefits are available in states with joblessness of 7 percent or higher. In states where unemployment is 9 percent or higher, another 10 weeks of benefits are available.

Any legislation that clears the Senate would also have to make it through the House. Speaker John Boehner has insisted that any measure to renew unemployment benefits should be paid for, so today's vote was just a hurdle on the way to the battle. And any deals cut on unemployment benefits might spill over into other battles coming up in the next few weeks, including the omnibus spending bill and the farm bill. After that, Congress will face its toughest challenge of the year when Democrats and Republicans will have to find a way to prevent us from defaulting.

The deal to end the government shutdown in October raised the debt ceiling until February 7. The Treasury can employ extraordinary measures to extend the deadline even further. How long is still up in the air; it could come as soon as late February or as late as June depending on the amount Treasury collects in tax receipts.

Details about the JPMorgan-Madoff settlement are coming out today. JPMorgan Chase will pay $2.6 billion to resolve criminal and civil allegations it failed to stop or really even raise a warning flag about Bernie Madoff's Ponzi scheme. The bank will pay $1.7 billion to settle the government’s allegations, $350 million in a related case by the Office of the Comptroller of the Currency, plus $543 million to cover separate private claims. It's apparently the biggest ever bank forfeiture and also the largest ever Department of Justice penalty for violation of the Bank Secrecy Act. JPMorgan officials will not be penalized.

But wait, there's more. JPMorgan has come to the settlement because they turned a blind eye to what was, at a basic level, money laundering. Back in 2007 and 2008 it became increasingly clear that JPMorgan's top executives knew there were problems, and there are emails to support that.

The bank itself was invested with Madoff through a number of feeder funds. In the fall of 2008, a JP Morgan memo laid out what was wrong with Madoff. It questioned his "odd choice of a one man accounting firm, " and said that there were "various elements of this story that" made the bank "nervous." Two weeks later, the bank sent a memo to UK regulators saying that Madoff's returns were suspicious.

That was around October/November 2008, and as that was going on, JP Morgan also took $275 million of its money out of Madoff feeder funds. Madoff was arrested on December 11, 2008. JPMorgan connected the dots when it mattered to its own profit, but wasn’t so diligent when it came to its obligations to report illegal activity.

The financial services industry has grown like an cancer with the help of taxpayer bailouts and ongoing subsidies, all of which increase our debt.  In 2011, the Commerce Department reported the financial sector accounted for 8.4 percent of GDP, and represented 30 percent of corporate profits. If proceeds of US debt had been invested for roads, high speed railroads, new industries, cheap energy, airports, and to fund scientific research, the debt would self-liquidate. But the bailouts came with a huge component of dead-end financing designed to let bankers suck rents from the financial system. The Fed monetizes debt through asset purchases and has been filling gaping holes in bank balance sheets.

Meanwhile, median incomes have continued their seemingly relentless decline; for male workers, income has fallen to levels below those attained more than 40 years ago. In the US, where a growing economic divide – with more inequality than in any other advanced country – has been accompanied by severe political polarization. Maybe we can avoid another round of political bickering that resulted in last year's shutdown. But even if they do, the likely contraction from the next round of austerity – which already cost 1-2 percentage points of GDP growth in 2013 – means that growth will remain anemic, barely strong enough to generate jobs for new entrants into the labor force. A dynamic tax-avoiding Silicon Valley and a thriving hydrocarbon sector are not enough to offset austerity’s weight.

The fundamental problem of the global economy in 2013 remained a lack of global aggregate demand. This does not mean that there is an absence of real needs – for infrastructure, to take one example, or, more broadly, for retrofitting economies everywhere in response to the challenges of climate change. But the global private financial system seems incapable of recycling the world’s surpluses to meet these needs. And prevailing ideology prevents us from thinking about alternative arrangements.

Maybe the global economy will perform a little better in 2014 than it did in 2013, or maybe not. Maybe the stock market will perform better this year or maybe it will crash. I don't know. The problem seems to be that money pours into the market by default or maybe just because the salespeople on Wall Street are effective. There are other places for the money to go, it just isn't going there right now, and that seems to be a wasted opportunity. 

Monday, January 06, 2014 - A Cold Forecast

A Cold Forecast

by Sinclair Noe

DOW – 44 = 16,425
SPX – 4 = 1826
NAS – 18 = 4113
10 YR YLD - .03 = 2.96%
OIL - .31 = 93.65
GOLD - .20 = 1238.80
SILV + .02 = 20.27

A few big things this week. Friday we'll see the monthly jobs report. Today we had the confirmation of Janet Yellen, no surprise there; on Wednesday we'll see the minutes of the most recent FOMC meeting which will give us the justification for the taper. The minutes will likely include strong differentiation between taper and tightening, and the Fed is likely to stress the importance of accommodative monetary policy and ultra-low interest rates for the next 18 months or so.

Any bond gains have been curbed as we start the new year; a combination of the Fed slowing its bond purchases, plus corporate supply, plus there is still the safe haven aspect of bonds in the face of a few days of weakness in the equity markets. This Friday's jobs report will prove important as a barometer for yields. More than 2.2 million jobs were probably created in 2013, the most since about 2.5 million eight years earlier. The estimates call for 195,000 net new jobs in December and the unemployment rate to hold at 7.0%. If the economy added more than 200,000 jobs we might expect a more aggressive taper; fewer than 200,000 jobs and the taper might be more sanguine.

Healthcare spending in the US rose 3.7% in 2012 to $2.8 trillion, the fourth year in a row in this range as the slow economic recovery tempered private insurance use, drug prices fell and the government held back payment increases for doctors. For the first time in more than a decade, health care spending grew more slowly than the US economy from 2010 to 2012. It marks the slowest rate of increase in healthcare spending since 1960, even though that $2.8 trillion figure represents 17.2% of the national economy. Expenditures on health care, including everything from hospital procedures to prescription medicines, rose less than 4 percent a year from 2009 through 2012, after growing by an average of more than 7 percent from 2000 through 2008 and by double digits in the previous decade.

Today the Institute for Supply Management said its index on services fell in December, while the Commerce Department said new orders for factory goods rebounded in November following a drop in October. The pace of growth in the services sector slowed for a second straight month in December with business activity expanding at a lower rate and new orders contracting, according to the Institute for Supply Management. ISM’s index fell to 53 points last month from 53.9 in November, dropping to its lowest reading since June 2013 and under expectations for a read of 54.5. A separate report from the Commerce Department showed new orders for factory goods rebounded in November, rising 1.8%, as had been forecast. The department also said orders for durable goods, manufactured products expected to last three years or more, rose 3.4% instead of the 3.5% increase reported last month. Durable goods orders excluding transportation rose 1.2%.

And then, just to keep things interesting, Alcoa kicks off the earnings reporting season. And after the Fed minutes on Wednesday, the Bank of England and the European Central Bank will meet to determine monetary policy on Thursday. It should be a fun week.

Last Friday, Fed Chairman Ben Bernanke gave an upbeat outlook on the economy but he cautioned that the recovery "clearly remains incomplete." That was part of an economic conference in Philadelphia. Bernanke got most of the attention, but one of the more interesting comments came from New York Fed President William Dudley, who said  a lot is still unknown about how the bond buying works. His observation is important because he has long been a supporter of aggressive Fed actions to help the economy. The New York Fed leader has for some time expressed support for continuing the purchases, even as he also voted in favor of the Fed’s decision last month to cut back.

Referring to the Fed’s stimulus program, Mr. Dudley said, “we don’t understand fully how large-scale asset-purchase programs work to ease financial market conditions—is it the effect of the purchases on the portfolios of private investors, or alternatively is the major channel one of signaling?” Mr. Dudley also said that when it comes time to unwind the Fed’s easy-money stance, uncertainty is again a major issue facing central bankers. “There could be unintended consequences” about moving to a more normalized state of monetary policy, he said.

I tend to think that such uncertainty runs deeper than it appears at the Fed, which is why policymakers are eager to end asset purchases. The more they buy, the more they risk "unintended consequences" at exit time.

It's a cold week for most of the country. Spot wholesale electricity in Texas  topped $5,000 a megawatt-hour for the first time as cold weather boosted demand and prompted the grid operator to import generation from Mexico and ask users to conserve power until at least tomorrow. Power consumption on the Electric Reliability Council of Texas network, which covers most of the state, averaged 53,369 megawatts for the hour ended at noon, a 6.7 percent increase from the day-ahead forecast of 50,034 megawatts. One megawatt is enough to serve about 500 homes during mild weather and about 200 homes during periods of peak demand.

The forecast is extreme: 32 below zero in Fargo, N.D.; minus 21 in Madison, Wis.; and 15 below zero in Minneapolis, Indianapolis and Chicago. Wind chills, what it feels like outside when high winds are factored into the temperature, could drop into the minus 50s and 60s. That's dangerous cold weather. Frostbite and hypothermia can set in quickly at 15 to 30 below zero. A flu epidemic has now spread across half the country. It hasn't been this cold for almost two decades in many parts of the country.

There have been plenty of problems associated with the weather, not the least of which is air travel. Airlines canceled 4,400 flights on Monday, bringing the total to more than 17,000 over the last week. Today, there is a scheduled flight worth noting, Delta Flight # 2014 from Minneapolis to Atlanta; it marks the last commercial flight for the DC-9. For the past nearly 50 year, the Douglas DC-9 was an aviation workhorse, credited with bringing jet service to most small and medium sized US cities. Delta was the launch customer for the DC-9 back in 1965.

Business bankruptcy filings in the US dropped 24% last year to the lowest level since 2006. The American Bankruptcy Institute reports the total filings by businesses and individuals fell to 1.03 million, the report said, from 1.19 million in 2012.

A trial over how Detroit should end costly financial contracts with two big banks was suspended today after more than a foot of snow fell, paralyzing much of the city and closing the federal courthouse there. Creditors of the city had been scheduled to make their closing arguments against a plan for Detroit to pay $165 million to exit the contracts, known as interest-rate swaps. The creditors say that termination fee improperly favors the two swap counterparties, Bank of America and UBS.

The storm also stopped the trial just as a group of creditors accused the mediator who negotiated the swap-termination deal of misconduct. The creditors filed an objection last week, contending that the mediator had exceeded the limits of his authority when he publicly praised the $165 million deal and said he would recommend that the bankruptcy court approve it.

The creditors, including both financial institutions and labor groups, complain that the swaps were invalid from the time Detroit signed them, in 2005. They say that if Detroit took legal action against the two banks, instead of paying them to end the contracts, the city could obtain a much better deal. If Detroit cannot obtain the new loan, proposed by Barclays Capital, the city has warned that it soon will soon be out of cash and unable to pay its workers.

It was not clear when the trial might resume.

JPMorgan Chase is expected to announce this week that it has reached civil and criminal settlements to the tune of $2 billion for ignoring the signs of the Bernie Madoff Ponzi scheme. Madoff used JPMorgan as his bank, and this is basically a money laundering charge against JPMorgan. All told, after reaching the Madoff settlements with federal prosecutors in Manhattan and regulators in Washington, the bank will have paid some $20 billion to resolve government investigations over the last 12 months, and there might be more settlements in the months ahead. Authorities have opened a bribery investigation into JPMorgan’s hiring practices in China, prompting the bank to turn over internal emails and documents about its “Sons and Daughters” hiring program, which employed the children of the nation’s ruling elite.

The Madoff case, perhaps the largest threat to JPMorgan as it hung over the bank these last five years, produced its own damaging emails. The emails, some of which came to light in a private lawsuit against the bank, suggest that even as questions swirled about the legitimacy of Mr. Madoff’s operation, JPMorgan continued to do business with him. In one internal email sent before Mr. Madoff’s arrest in December 2008, a senior risk manager at JPMorgan reported that another bank executive “just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.” No individual executives have been accused of wrongdoing.

JPMorgan’s Madoff settlements will also likely involve a so-called deferred prosecution agreement, a criminal action that would essentially suspend an indictment as long as JPMorgan acknowledged the facts of the government’s case and changed its behavior.  JPMorgan has publicly maintained that “all personnel acted in good faith” in the Madoff matter; they may have to modify that position in light of the deferred prosecution agreement.

Friday, January 03, 2014 - Trust Me

Trust Me

by Sinclair Noe

DOW + 28 = 16,469
SPX – 0.61 = 1831
NAS – 11 = 4131
10 YR YLD + .01 = 2.99%
OIL – 1.30 = 94.14
GOLD + 15.00 = 1239.00
SILV + .14 = 20.25

Fed Chairman Ben Bernanke will retire from public service at the end of the month, and likely wander off to be a well paid consultant or director at one or more banks or private equity firms. Today he gave what might be his final speech as the Fed head. Speaking at the American Economic Association forum in Philadelphia, Bernanke said that even though the FOMC announced taper in December, they were still committed to highly accommodative monetary policy for as long as needed; "Rather, it reflected the progress we have made toward our goal of substantial improvement in the labor market outlook that we set out when we began the current purchase program in September 2012.”

He tempered the good news in housing, finance and fiscal policies by repeating that the overall recovery "clearly remains incomplete", adding that the number of long-term unemployed Americans "remains unusually high." This is something like the doctor telling you the cancer has been cured but there is still a massive tumor. As of the November jobs report, the labor market has 1.3 million fewer jobs than December of 2007. In a healthy environment, we would have seen jobs added as the population grew; the economy would have needed to add 6.6 million jobs just to maintain the level of December 2007. Counting jobs lost plus jobs that should have been gained to absorb all those people coming into the labor market, the economy had a shortfall of 7.9 million jobs as of November 2013.

So, as QE tapers into the sunset, what tools does the Fed have to juice the economy? Bernanke said the central bank has the tools - including adjusting the rate on excess bank reserves and so-called reverse repurchase agreements, or repos - to return to a normal policy stance without resorting to asset sales. And then he added: "It is possible, however, that some specific aspects of the Federal Reserve's operating framework will change." That sounds a bit cryptic, but remember there is a thing called Permanent Open Market Operations, which is when the Fed buys or sells securities outright in order to add or drain reserves available in the banking system. There is plenty the Fed could do, and most of it will likely not filter down to Main Street.

Americans have a very pessimistic view of our government, and we don't trust elected officials to solve the nation's biggest problem. A new poll by the AP-NORC Center for Public Affairs finds half believe the American system of democracy needs either "a lot of changes" or a complete overhaul. Just 1 in 20 says it works well and needs no changes. The percentage of Americans saying the nation is heading in the right direction hasn't topped 50 in about a decade. In the new poll, 70% lack confidence in the government's ability "to make progress on the important problems and issues facing the country in 2014."

Local and state governments inspire more faith than the federal government, with 45% at least moderately confident in their state government and 54% expressing that much confidence in their local government. Other results of the poll show 86% of those who called health care reform a top priority said they want the government to put "a lot" or "a great deal" of effort into it, but about half of them are "not at all confident" there will be real progress; 65% who consider the budget and national debt to be a priority don't believe the government can fix the problem; 57% say "we need a strong government to handle today's complex economic problems." Even among those who say "the less government the better," 31 percent feel the nation needs a strong government to handle those complex problems.

Simon Johnson is the former chief economist for the IMF; he has written books and some great articles about how the banksters have effectively taken over the government. He provided an update in the New York Times, saying:

When middle-income “emerging markets” encounter a financial crisis because of dysfunctional incentives in the banking system, the obvious reaction is to adopt reforms that make banks safer…Prominent people in other sectors are deeply annoyed at the collateral damage caused by excessive risk-taking by bankers.

And in most middle-income countries, the financial sector comprises at most a few percentage points of gross domestic product…

In contrast, in a country like the United States or Britain, the financial sector is much larger as a percent of G.D.P. – from 7 to 9 percent, depending on how exactly you measure it. This is a direct result of having accumulated more financial assets – a direct result of prosperity and the reasonable desire to save for retirement.

In addition, because rich countries are able to issue a great deal of government debt in the short-term and have central banks with credibility in limiting inflation, they are able to provide very large amounts of support, direct and indirect, that prevent prominent financial companies from collapsing.

There is no sector in the modern United States or Britain that is willing to stand up to big banks in the political arena. And top financial-sector executives continue to enjoy such high prestige that they are still called upon to run public finances.

Five years after the worst crisis since the 1930s, the conventional wisdom in Washington is once again that United States is a bastion of global stability and that it is important for the national interest that the financial sector should remain basically as is.

There is no desire to discuss how financial crises affect fiscal deficits and push up government debt. There is no inclination to recognize that providing support to parts of the financial sector undermines the legitimacy of the central bank.

The rise of finance is a mark of success – and it can also be most helpful to sustaining economic growth. But the political power of big financial institutions means trouble, because it provides cover for a high degree of private leverage that is prone to collapse.

Of course, hardly anyone is calling for a collapse in 2014; maybe a few perma-bears, but it's a tough case to sell. Most forecasters are warning stock investors not to expect another year of 30 percent gains, as there was in the S&P 500 in 2013. When the Federal Reserve said in September that the economy was too weak for the central bank to taper its purchase of securities, stocks went up. When the Fed said in December that it would begin to taper, stocks still went up. When the government shut down, stocks went down for a bit, then stocks went up. There seems to be a trend here, and trends continue until they end. The unanimity of forecasts may be cause for concern.

Each year about this time, people who talk about the markets and the economy are prone to make predictions, and most of them are wrong; some are right or nearly right but that isn't because the person has a crystal ball. Still, many people believe in the crystal ball and believe that some people actually know what stock prices will do and they go on CNBC or Fox and they talk to reporters and they give their money making knowledge away, but you know they don't give away this great knowledge out of pure charitable aspirations to aid humanity. Odds are that their words are designed to make people buy the very stocks in which they already have an investment, or otherwise churn positions for a commission. So, the market analysis is frequently nothing more than a slick sales pitch, and the wildly optimistic or pessimistic forecasts are little more than a way to separate from being lost in the herd.

We have similar problems with economists. If you head a big pharmaceutical company and you want to strengthen your patent monopolies to allow you to charge more money for your drugs for a longer time, there is no shortage of economists who will argue your case, for a nice fee, mind you. If you run an investment bank and you want to avoid regulations and oversight, there are plenty of economists who can be purchased to draw impressive charts and claim that government interference will slow growth and cost jobs. The rules for responsible household budgeting are not the same as the rules for responsible federal-government budgeting. We get economics dumbed down for the masses, or distorted because there is money at stake. There are plenty of economists who, under the influence of moneyed interests, are willing to put forward arguments that don’t fit the data. For this reason, the public has rightly grown skeptical of economists.

And then there are the government officials who are willing to take impassioned stands on behalf of campaign donors, which is just bribery. And so we we don't trust elected officials to solve the nation's biggest problem. We have a pessimistic view of our ability to ever solve our problems. And that's unfortunate because our problems are solvable. 

Thursday, January 02, 2014 - Back in the Groove

Back in the Groove

by Sinclair Noe

DOW – 135 = 16,441
SPX – 16 = 1831
NAS – 33 = 4143
10 YR YLD - .04 = 2.99%
OIL – 2.93 = 95.49
GOLD + 17.50 = 1224.00
SILV + .57 = 20.11

I'm back. We'll try to settle into the groove here, starting with a look at the daily economic news.

Financial data firm Markit said its final US Manufacturing Purchasing Managers Index rose to 55.0 last month, beating November's 54.7 reading. So, manufacturing ended the year on a high note, growing in December at the fastest pace in 11 months.

Signs of strength in both the manufacturing and services sector as well as stronger job growth across the economy contributed to the Federal Reserve's decision in December to begin tapering, slowing its monthly bond purchases. I had expected the Fed would wait to begin the taper. I was wrong. It wasn't really a shocking development because we knew they would eventually taper, it was just a matter of timing. The taper hasn't actually started yet, it's only been announced.

One area where we're starting to see some impact is in mortgage rates, now at the highest levels since September. The average rate for a 30-year fixed mortgage was 4.53% this week, up from 4.48%. And Freddie Mac also reports the average 15-year fixed rate climbed to 3.55% from 3.52%.

While a jump in mortgage rates has slowed demand, buyers continued to push prices higher. According to the most recent S&P/Case-Shiller home price index, prices in 20 US cities rose 13.6% in October from a year earlier. Some of the price increase is because there are fewer foreclosures, which typically are sold with discounts. And earlier this week, the National Association of Realtors reported contracts to buy previously owned homes rose 0.2% in November, the first increase in six months, after a 1.2% drop in October that was larger than initially reported.

Meanwhile, Eurozone manufacturing also posted its strongest growth since May 2011, but there were some significant divergences with Germany posting solid growth and France showing a decline.

A separate report showed the ISM  factory index fell to 57 in December from the prior month’s 57.3, which was the highest since April 2011. Readings above 50 indicate expansion.

Russia retained the title of the world's top oil producer for 2013. For a while, the US overtook the top spot from Russia. The Russian oil output rose to a post-Soviet high of 10.51 million barrels per day in 2013, up almost 1.4 percent from 2012. We've seen a huge increase in domestic oil production, but Russia's economy relies on oil revenue and as oil prices declined, the Russians responded by boosting output.

In the US, small businesses increased their borrowing in November. The Thompson Reuters/PayNet Small Business Lending Index, which measures the volume of financing to small companies, rose 1% in November from a year earlier. That would seem to be a leading indicator of continued economic expansion, and maybe an early signal of increased hiring ahead.

Applications for unemployment benefits declined last week to the lowest level in a month. Jobless claims fell 2,000 to 339,000. The number of people continuing to receive jobless benefits dropped by 98,000 to 2.83 million. The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs. Those job-seekers rose by about 58,000 to 1.39 million in the week ended Dec. 14. Those extended benefits lapsed Dec. 28 as Congressional Democrats failed in a last-ditch effort to prolong the assistance before the House adjourned earlier in the month. Senate Democrats have pledged to consider a measure to reinstate the aid next week as lawmakers return to Washington.

The expiration of the extended benefits will leave about 25 percent of jobless Americans collecting unemployment insurance payments, down from 38 percent. Since 1946, when data was first collected, the share of unemployed receiving state or federal aid has never dropped below 30 percent.

Thirteen states raised their minimum wage yesterday. Those boosts will provide the country's low-wage workforce with some relief. But in many areas they won't be enough to bridge the gap between what people are paid and what they need to cover basic expenses. None of the states raised their minimum wages as high as $10.10, which is the wage proposed last year by Senate Democrats and later supported by President Obama.

Also yesterday, the Affordable Care Act went into law. Health insurance companies can't turn away anyone because of their medical histories or pre-existing conditions. Prices can't be higher for people with chronic ailments, or for women, and older individuals can't be charged more than three times what younger customers pay. Basic benefits like hospitalizations, prescription drugs and mental health care must be covered. Annual and lifetime limits to essential coverage are gone. And nearly everyone must obtain health coverage or face a tax penalty under the individual mandate.

More than 2.1 million people have signed up for Obamacare. Also, states report 3.9 million people signed up for Medicaid, which is expanding coverage in 25 states and the District of Columbia. Enrollment surged in December as the deadline for January coverage approached.

There are still problems with the website; it's working better than before, but that's not saying much. Some consumers still can't navigate their way, others will find the insurance they chose isn't in place, and others, whose polices were canceled because they didn't meet standards, will suffer lapses in coverage if they couldn't complete applications in time. But it's official now. You can't really undo 2.1 million insurance policies.

The S&P 500 finished 2013 with 30% gains, after posting all time highs for the first time since 1999.  The Dow average climbed 27 percent in 2013 for its best performance since 1995.

The first trading session of January has proven profitable for investors over the previous five years, with the index gaining an average of almost 2 percent that day since 2009. Three rounds of Federal Reserve stimulus and better-than-forecast corporate earnings have helped the S&P rally as much as 173% from a 12-year low in 2009.

Last January, the Dow posted a 5.7% gain for the month, and the S&P was up 5% for January 2013. And we were off to the races. There is a theory that the movement of the S&P 500 during the month of January sets the stock market's direction for the year (as measured by the S&P 500). The January Barometer states that if the S&P 500 was up at the end of January compared to the beginning of the month, proponents would expect the stock market to rise during the rest of the year. The theory comes from the Stock Traders Almanac.

Officially, the Almanac says every down January since 1950 has been correctly called by its Barometer and has a long-term batting average of almost 80%. In some instances a month seems like too long to wait. In those cases it’s possible to make a call after only five days, thanks to a predictive power that’s been almost 90% accurate over the years. You also look to history which says great years tend to be followed by good years. We end up seeing an average increase of 10% in the year following gains of 20% or more 80% of the time.  2013 was only the 6th time since 1929 that stocks finished the year at their annual high, a rarity that has historically preceded price gains in subsequent years by an average of 8.5%. Of course, if you want absolute certainty, you'll have to wait 12 months.

And even if the January Barometer does work, which it probably does, well, you've still got to be in the market, or get out of the market, depending on the signal. There's some old investing wisdom that says that “being right and making money are not the same thing.”

Those of us lucky enough to own stocks are a bit wealthier than a year ago, at least in theory, and depending on exactly what we own, and of course, on paper.  At least part of the rally in stocks has been driven by signs of a resilient, if not exactly booming, economy. It is a far better thing for stocks to be rising than for them to be falling. Despite the steady stream of good news out of the stock market, the majority of Americans still think the economy is getting worse, not better. Of course, only about half of Americans own stock, and that includes those in retirement accounts; they rely on wages, which haven't really budged.

Over the next few weeks and months, we'll likely hear a rash of good news about the economy; or is it a flurry of good news; maybe a passel of good news? No, I think it's more like a rash. The pessimism of 2013 was overdue, so we might expect undue optimism in 2014. And once we find a particular narrative, we'll fit the facts around it. You need to look beyond the headline growth figures. Once the monetary stimulus is exhausted, we'll probably need a new narrative for monetary policy. We still need to see improvement in the labor force. We still have enormous problems in Washington, and the budget issue will be front and center in the coming weeks. We'll need some new technology to lift us to whatever place we need to go. Maybe we'll find it. I hope so.